Archive | October 2015

Nobel Prize and Equality/Equity issues

This year`s Nobel prize for Economics was awarded to Angus Deaton, whose most recent work was entitled “The Great Escape: Health, Wealth and the Origins of Inequality”. Thus, like several other contemporary economists, such as Thomas Pikkety, Angus Deaton is concerned about the growth of inequality both within countries and globally. He considers that improvements in health care are vital to remove one of the root causes of inequality. This could be seen as another external benefit of health care.

Another economist who is very concerned about poverty and its effects is Professor Jeffrey Sachs, who is the Director of the Earth Institute at Columbia University and a Professor of Sustainable Development. He was in Tokyo last week, giving a lecture at the United Nations University. He made the interesting comment that for a very rich person the marginal utility of income may not merely be diminishing (as we have studied) but may also be negative.

I will quote from a reply he sent in answer to a question from a student. ” What then does the extra money bring?  It may bring more power, perhaps.It generally brings attention and notoriety.  It brings many courtiers and people seeking assistance.  It generally leads to a loss of privacy. It may lead to a competitive situation where the super-rich individual is
expected to climb further up the rankings of the super rich.  We do know that many super-rich people end up as alcoholics, drug addicts, divorced, scandal-ridden, isolated, eccentric, or socially burdened in some other way.

All of this is why I said that imploring the super-rich to use their money philanthropically, and imploring society to tax the super-rich adequately, are both correct and socially useful approaches in my view.”

Let’s see if you think like an economist.

(written by Richard Nisbett in the Los Angeles Times)

You have tickets for a basketball game in a city 45 minutes from your home. But the star is not going to play, nothing hangs on the outcome and it’s raining hard. Suppose you paid $100 for the tickets. Would you go to the game or stay home?

A municipal hospital in your area is obsolete. The city can build a replacement or it can remodel the old one, which was extremely expensive to construct. The quality and the cost would be about the same either way. Which course would you choose?

A hot new restaurant is getting phenomenal reviews. You wait three hours for a table. But when your beef stroganoff arrives, it’s flavorless, and you realize you’re not that hungry. Do you finish your plate?

If you’re like most people, you probably feel that $100 is just too much money to throw away, and you should therefore attend the game. Likewise, you vote to remodel the old hospital, because building a new one seems profligate. And you eat every bite of that bland entree, because you invested so much time in your meal.

An economist would do none of these things.

If you think like an economist, you tell yourself: “The rest of my life begins now. What happened in the past is irrelevant.”

It doesn’t matter that you paid a lot for the basketball ticket, because you won’t get your money back by attending the game. And it doesn’t matter how much the city spent constructing the old hospital, or how long you waited for a table at the fancy restaurant — because these are all “sunk costs.”

If you sit through a lousy movie instead of walking out, you’ve paid twice — once for the ticket and once for the viewing.  (Notice that the OPPORTUNITY COST has been effectively doubled). You should consume a thing, or participate in an event, or work on a project only if those activities have current value (ie the marginal benefit is greater than or at least equal to the marginal cost).